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A niche player with strong competitive positioning: 

Zen Technologies (ZEN) is a niche player in the defense simulator-based training market. The company has also forayed into the counter-drone market. The addressable markets for simulators and counter-drones in India are estimated at ~INR140b and INR120b, respectively, over the next five years. The company commands a significant market share in both of these segments, with just 2-3 players in the defense simulator market and 5-6 players in the counter-drone market.

Healthy financials backed by a robust order book:

ZEN has established a strong vendor base for simulators and has achieved backward integration for counterdrone solutions, resulting in strong margins and a high RoCE. The company is also planning to foray into newer defense segments. With a healthy order book of INR14b and a likely inflow CAGR of 37% over the next three years, we expect its revenue/EBITDA/PAT to clock a CAGR of 63%/57%/56% over FY24-27.

Valuation and View:

: We value the stock at 40x Jun’26E earnings. We initiate coverage on the stock with a BUY rating and a TP of INR1,775. We expect the company to: 1) grow at a much faster pace than the industry, 2) have a very strong margin, and 3) expand its capabilities across other defense segments.

Long-term industry growth drivers in place

The Ministry of Defence (MoD) had rolled out a comprehensive simulation framework aimed at enhancing the utilization of simulators by the Armed Forces and Coast Guard, with a view to achieving cost-effective, efficient, and smart training. As per industry estimates, the Indian simulator market is likely to grow to USD1.7b by FY29 from USD1b, at a 10% CAGR driven by the government’s increased focus on virtual training. Additionally, there is an increased focus on the Agnipath Pravesh Yojana (APY), which would also drive demand for faster training of new recruits. Further, the counter-drone market is also expected to grow to USD1.4b by FY29, driven by the requirement to install anti-drone systems across the borders. ZEN has a strong market share in both of these segments. We expect ZEN to benefit from its wide product portfolio in simulators, counter-drone, and new areas over the next five years.

Well-positioned simulator portfolio to capitalize on opportunities

ZEN has a portfolio of over 40 products designed and developed indigenously, ranging from live fire, live instrumented, virtual, and constructive training systems for individual and collective training, as well as counter-drone solutions. Its extensive product portfolio is also complemented by a services division that provides after-sales service, warranty, and AMC, et al. ZEN also boasts 150+ filed patents, with nearly 70 already granted. Notably, the company is self-reliant and does not rely on imports for its supply chain.

Fully backward integrated counter-drone product

ZEN has an advantage of having a fully backward integrated counter-drone portfolio. the company has in-house manufacturing of jammer and detector. Radar is developed by its subsidiary UTS. ZEN also has a 51% share in AI Turing for EO camera, so the company is completely integrated in the counter drone system. It also has capabilities of both soft kill and hard kill and hence is ahead of most of its competitors.

Strong competitive advantage

ZEN has a diverse customer base spanning over 100 government customers. The company also boasts customer loyalty, with 90% repeat orders. In the simulator market, ZEN secured nearly 11 out of 12 contracts tendered out during FY24, capturing more than 80% market share. In the anti-drone market, ZEN competes with 5-6 players but it has an edge over others in terms of backward integration. The company generates healthy EBITDA margin due to its strong competitive positioning.

Current order book provides healthy revenue visibility

In FY24, the company secured orders worth ~INR13.6b, taking the total order book to INR14b diversified across both simulators and anti-drones. Additionally, there is a healthy order pipeline for both simulators and anti-drone systems, ensuring revenue visibility for the next few years. We anticipate order inflows and revenue to report a CAGR of 37% and 63% over FY24-27, respectively.

Asset-light model can potentially generate strong RoE and RoCE

The company boasts an asset-light business model that does not require high capex. Instead, ZEN invests in R&D to build robust Intellectual Property Rights (IPRs). The manufacturing of simulators is outsourced, which helps generate a healthy fixed asset turnover ratio. Material costs account for 20-25% of sales, resulting in a significantly higher gross margin. The asset-light business model also helps to generate an RoCE of 30-40%.

AMC business will grow in line with product business over few years

In FY24, the company generated 8% of its overall revenue from the AMC business. The lifecycle of a simulator is 15 years, creating a lifetime revenue potential of 120% of product sales. With the increase in the installed base of simulators, AMC revenues will also grow simultaneously.

Aiming to increase exports from the current levels

The company is focused on expanding its geographical footprint by capitalizing on opportunities in both anti-drone systems and simulators. Currently, it has a presence in markets such as Nigeria, Qatar, Malaysia, the UAE, Kenya, and Egypt. As of FY24, the share of exports stood at 19%, and ZEN aims to increase it to 35% by FY28. This strategy will boost margins as exports are more profitable for ZEN.

Financial outlook

We expect a revenue/EBITDA/PAT CAGR of 63%/57%/56% during FY24-27. This growth will be led by: 1) order inflow growth of 37%, due to a strong pipeline across simulators and anti-drones, 2) EBITDA margin of 37%/36.5%/36.5% for FY25/FY26/ FY27, and 3) enhanced control over working capital due to improved collections. With a substantial revenue growth, healthy margins, and stable working capital, we expect ZEN’s RoE and RoCE to improve to 38% and 38% by FY27, respectively.

Key risks and concerns

Any slowdown in procurement from the defense industry, especially for simulators, can expose the company to the risk of reduced order inflows and hinder its growth. ZEN is also exposed to foreign currency risks for its export revenue. High working capital can also pose risks to cash flows, as historically, ZEN’s working capital has remained high due to issues related to high debtors and high inventories. This is likely to come down due to improved collections and lower inventory, as per the management. However, any delays in the same can affect cash flows for FY25/26.

Valuation and view

We value the stock at 40x Jun’26E earnings. We initiate coverage on the stock with a BUY rating and a TP of INR1,775. We expect the company to: 1) grow at a much faster pace than the industry, 2) have a very strong margin, and 3) expand its capabilities across other defense segments.

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